CAPEX Q3 2017

Improvement in oil prices this quarter has supported an increase in M&A activity and higher project spends. Additionally, there has been a shift in focus towards alternative energies and this trend is expected to continue in the future, leading the region towards adopting a more balanced approach between conventional and alternative energies

While low oil prices have significantly affected regional economies, over the past quarter, the market has witnessed a major improvement in oil prices. Brent crude oil prices rose from approximately USD 49.7 a barrel in July to a current high of approximately USD 59 a barrel; a c.19% increase. This improvement in prices is attributable to three major reasons – catastrophic hurricanes in the United States, OPEC production cuts and stronger global economic recoveries. After the US was hit by Hurricane Harvey, and soon after, hit by Hurricane Irma, the country saw multiple plants and operations within the energy sector shut down. This resulted in approximately 3mn barrels a day (about 17%) of refining capacity to go offline, thus leading to a large reduction in oil supply. Additionally, with a majority of OPEC members adhering to oil production cuts as promised, ministers have expressed that the supply glut is slowly clearing and have mentioned a possibility of production cut extensions. In addition to a gradual decrease in oil supply, data reveals that global economies are doing better, which has encouraged growth in demand overall. While 2016 saw global growth rate at c.3.1%, this year, global growth rate has increased to c. 3.5%.

With optimism slowly settling into the energy sector amid signs of a tighter balance between supply and demand in the global market, the past quarter has witnessed a large increase in announcement of mergers and acquisitions (M&A). While certain companies have been on the look-out for good valued firms that can support expansion plans and can provide integration opportunities, other companies believe that the market will soon pick up – given the cyclical nature of the industry – and have thus decided to take advantage of the current market situation to command a higher market share. Moreover, with a greater focus on operational efficiency, companies are keen on selling assets that are not in line with their core business, thus leading to a higher number of M&A activity. Table 1 illustrates several key consolidations that have taken place this quarter.

With the energy market gradually witnessing improvements, project spends in the region saw normalcy return with Q3 2017 seeing c.USD 14bn in awards* compared to the c.USD 5.3bn seen in Q2 2017. Although Q3 2017 witnessed a c.164% increase in spends compared to Q2 2017, an analysis of spends over the last 10 quarters reveals that the spends this quarter are still slightly below the average spends from the last 10 quarters. Of the c.USD 14bn, a majority stems from only a handful number of large projects indicating that while this quarter saw moderate spends, project activity is still relatively low. Some of the key projects that were awarded this quarter include DEWA’s Mohammad Bin Rashid Al Maktoum Solar Power Plant (IPP): Phase 4 worth c.USD 3.9bn, KOC’s ZOR Feed Pipeline worth c.USD 850mn and Kuwait’s Waste to Energy plant worth c.USD 780mn. Additionally, DRPIC issued a letter of intent for its Duqm Refinery project worth a combined c.USD 5.7bn this quarter.

A deeper examination of project spends reveals that the alternative energy sector contributed c.28% of spends seen in Q3 2017 – the highest seen over the past 3.5 years. While many GCC countries have spoken in the past about increasing the generation of power via renewable energy, significant activity within this space has recently started to become visible. Given the challenges associated with faster growth in power demand and lack of guaranteed feedstock in the market, countries now want to meet targets by focusing on power diversification. While this will allow countries to spread their risks, it will also allow them to generate additional revenue by monetizing oil currently being burnt to meet the region’s additional feedstock (gas) requirement. Additionally, by focusing on alternative energy options, countries can be energy independent which will safeguard them from having to rely on neighboring countries during geo-political problems. Several initiatives that have been carried out across the GCC in the alternative energy sector are:

UAE:With an aim of generating 7% of Dubai's total power output from clean energy by 2020, 25% by 2030 and 75% by 2050, DEWA has announced that it will be installing solar panels on the roofs of 640 villas of UAE nationals in Hatta, free of charge. This initiative, part of Shams Dubai, will not only provide solar-generated power for homes but also generate electricity that can be fed into the electricity grid

Saudi Arabia: The Kingdom has issued a regulatory framework for electricity consumers to operate their own, small-scale solar power generating systems and export unused power to the national grid. The rules will be implemented from July 2018 and will cover small photovoltaic facilities with a maximum generating capacity of 2 megawatts. Consumers will have their excess electricity offset against their future consumption and after a year, they will receive cash payments at a tariff approved by the authority

Kuwait: Given that the country aims to cover 15% of its power needs via renewable energy by 2030, it has announced that it will issue a tender for the Dibdibah solar power project worth c.USD 1.2bn. This 1GW project is expected to produce half of the country’s planned renewable energy output by 2030. Moreover, with GlassPoint nearing its completion of the Miraah solar pilot plant in Oman, Kuwait is looking to develop a similar plant. As Kuwait faces gas shortages, the solar plant will allow the country to generate steam that can be directly fed into its EOR operations for heavy oil production

Oman: Masdar has signed an EPC contract with a consortium of GE and TSK to build the GCC’s first large-scale wind farm in Oman. This wind farm, which is expected to generate 50MW of power, is expected to supply electricity to an estimated 16,000 homes and will represent 7% of the total installed power generation capacity in Oman. Additionally, ‘Energy Development Oman (EDO)’, a subsidiary of PDO, was established to cater to alternative energy projects

Bahrain:With an aim of generating 5% of the country's electricity consumption via renewable energy by 2025, the country has announced its plans to develop a 100MW solar power plant. The tender process is expected to commence in February 2018

"We are soon likely to see the region pursuing a more balanced combination of conventional and alternative energy projects instead of the past reliance on conventional energy projects"

With the renewable energy market slowly gaining traction, we are likely going to see this trend continue over the next several years. Moreover, we are soon likely to see the region pursuing a more balanced combination of conventional and alternative energy projects instead of the past reliance on conventional energy projects.

While this year has so far seen c.USD 33bn worth of project awards, using our proprietary Tiering methodology (where Tier 1 projects have a 70% or greater probability of going ahead and Tier 2 projects have a 30% probability of being awarded), Contax Partners believes that the market will likely see an additional c.USD 17.8bn worth of awards by the end of this year. A country split of projects categorized as Tier 1 for this year reveals that c.50% of the projects are anticipated to take place in UAE while c.25% are expected to take place in Saudi Arabia. A sector split reveals that the oil & gas production and power sectors will account for c.51% and c.20% of project awards respectively.

With optimism that oil prices may rise by c.25% in 2018, and with project feasibilities looking more promising, regional energy activities are anticipated to continue rising, thus creating several opportunities within the energy space. With new signs of optimism returning to the markets, Contax Partners can support project owners, contractors and suppliers with holistic market intelligence & insights about the various upcoming opportunities and strategies in taking advantage of improving markets. For more information, contact the VP of Business Advisory Services, Ann-Marie Carbery, at This email address is being protected from spambots. You need JavaScript enabled to view it.

*Awards include DRPIC’s Duqm Refinery project. DRPIC has issued a letter of intent to its preferred contractor and the project is currently pending financial close.

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Since our establishment in 1985, Contax Partners has been the advisor of choice for companies operating within the constantly evolving Middle East, Russia and Africa energy sector. Having operated in the energy market for over 30 years, we have a track record of empowering our clients to win business. Contax Partners is well placed to understand the challenges, and what impact these can have on your growth plans for the Middle East, Russia and Africa.